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UK General Election – A Momentous Week for Great Britain

Posted on: 07 June 2017
, by: Darren Sinden
, category: Market Review

We have just three days to go until what, for Great Britain, may be one the most defining political events of the last two decades. Namely the UK General Election. The result will strongly influence the UK’s future relationships with Europe and other nations across the globe.

When PM Theresa May called the surprise snap election in mid-April, she had a commanding 24-point lead in the opinion polls and her Conservative party looked certain to score a crushing victory over Jeremy Corbyn’s overtly socialist Labour party. Not least because, Mr Corbyn, despite strong grass roots support amongst activists on the ground, could not count on the support of many of his own MP’s.

However, as the election campaign has progressed Labour have narrowed the gap between themselves and the Conservative party considerably. Some recent projections suggest the election could be a dead heat, resulting in a hung parliament. In which no one party has an overall majority and where Labour might form a coalition government with the Scottish Nationalists or SNP.

These projections, which were made by market research house YouGov, certainly grabbed a lot media attention. Both at home and internationally and perhaps that was the point. However, the methodology behind the findings and the wide margin of error that was contained within them have come in for significant criticism.

Nonetheless an average of recent opinion polls, calculated over the weekend showed the conservative lead had slipped to just 7%. Though that’s still sufficiently large enough to hand a clear victory to Theresa May.

That figure is confirmed this morning by the Financial Times election poll tracker, which puts the Conservatives on 44% of the vote and the Labour Party in second place on 36%.

The Liberal Democrats are projected to win just 8% of the vote, with the SNP, UKIP and the Green Party being left to fight for the scraps with between 2% and 4% of the vote a piece.

What factors could influence the vote?

Remember though that the UK has a First-Past-The-Post constituency system. Which means that votes need to be gathered in significant concentrations to gain parliamentary seats.

For example, the UK Independence Party or UKIP, won around 11% of the popular vote in 2015’s general election. But they did not gain a single seat as a result. Why? Because those votes were too thinly distributed across the country.

This is an important distinction and is one of the reasons that opinion poll results often deviate from the actual results in UK elections.

However, there are probabilistic models that attempt to bridge this gap. These models employ a similar methodology to modern weather forecasts. In that they simulate a wide variety of scenarios with different inputs and criteria. The results of these simulations are then sorted and the scenario or scenarios that occur most frequently are seen as the likely outcome or forecast.

One such model is run by the former deputy chair of the conservative party Michael (Lord) Ashcroft. A prominent, if somewhat controversial figure in both UK politics and business.

His polling models predict, at the time of writing, a 60-seat majority for Theresa May.

Though this lead is likely to fluctuate based on turnout and could rise to 69 seats (if Thursday’s turnout among voters matches that seen in in 2015). Or alternatively it could fall to just 50 seats, if the footfall at the polls matches that seen in 2016’s Brexit referendum.

Of course, the tragic events at the weekend here in London will play their part in the outcome on Thursday. Whilst neither party is likely to try make overt political capital out of a terrorist attack, both of the main parties will certainly want to talk about what actions they will take to combat, what looks to be a growing threat to our security. Whoever is perceived to be the most credible of the two parties, on this issue, could well pick up undecided swing voters.

The final factor we need to consider is the weather. Which can influence voter turnout.

Jeremy Corbyn’s support is generally felt to come from the younger generation who are not seen as habitual voters and who may be more easily put off from voting by inclement weather than the older generation of UK voters, who are seen to be more closely aligned to Theresa May’s Tory party.

The forecast for the early part of this week, looks likely to beset by large downpours, with weather warnings already in place from the Met office.

Worryingly, from Mr Corbyn’s point of view, the forecast for Thursday’s weather currently shows further bands of heavy rain across much of the country. He and his advisors will hope that this forecast and the polls are wrong and that the sun will be shining come the big day.

So, what does this mean for the pound?

As far as the markets are concerned a Conservative victory with a clear majority for Theresa May is the best outcome. Sterling is thought likely to rally on a Tory victory with some in the market predicting a cable (GBP USD) rate of $1.32 on this outcome.

The UK currency is likely to weaken against the Dollar however, if Mr Corbyn becomes prime minister, via an outright win or as part of a coalition. With Cable expected to then trade down to $1.24, under this scenario.

Though any Corbyn led government is likely to be reflationary i.e. it will spend more money on public services and infrastructure etc. There are concerns about how such spending would be paid for. Suggestions of additional land and property taxes, as well as rises in both corporate and personal taxes for high earners, could prove damaging to economic sentiment in the short term and to the real economy longer term.

A 50-seat majority for Theresa May would provide her with the strong mandate she is seeking. Which would strengthen her hand in forthcoming Brexit negotiations.

Whilst the Conservatives strategy for these negotiations has not been clearly set out. Labour’s plans are not seen as being coherent. And of course, it was disaffected Labour voters that were largely responsible for the vote leave victory, in the 2016 Brexit referendum.

UK Government bonds have rallied over the last month, continuing a rebound that has been in place since late January.

Whether this should be seen as a vote of confidence for the UK economy or is representative of a move away from risk assets, on part of investors, is not clear.

Though the fact that UK stock markets are at (or close to) record highs suggests that markets are not overtly risk off, as far as the UK is concerned.

Whilst the pound has also bounced back against the US currency, since its 16th of Jan lows, at 1.2047. It has fared less well against the euro, with the pound down around -2.6%-year date (as of Fridays close) against the single currency.

There is clear resistance in sterling euro between 0.8750 and .8800. An area from which sterling has rallied on two occasions this year. Firstly, in mid-January and once again in mid-March. The overall tone for sterling euro, into the election, may well be influenced by the ECB interest rate meeting at 12.45pm London time on Thursday. An entree if you like to the election’s main course.

Whilst opinion polls and predictions can prove to be inaccurate, exit polls in UK elections tend to provide more accuracy as far as results are concerned (though they are not infallible).

The exit poll findings will be made known late on Thursday evening or very early Friday morning. There will also be actual constituency results released throughout the night that will undoubtedly influence the markets.

But remember that, an early result from Newcastle, in the 2016 referendum, which appeared to predict a clear vote remain victory, turned out to a be a significant red herring that wrong footed the markets completely.

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